E N V I R O N M E N T D P A R TME N T _d * PA-P E RS PAPER NO. 036 TOWARD ENVIRONMENTALLY AND SOCIALLY SUSTAINABLE DEVELOPMENT ENN fRONMIE.ENTAI FC()\ONIICS SERIES Towards a Sustainable Economy Can We Survive Green Advice? Stein Hansen June 1996 Environmentally Sustainable Development The World Bank FESD Pollution and Environmental Economics Division Towards a Sustainable Economy Can We Survive Green Advice? Stein Hansen June 1996 Papers in this series are not formal publications of the World Bank. They are circulated to encourage thought and discussion. The use and citation of this paper should take this into account. The views expressed are those of the authors and should not be attributed to the World Bank. Contents Acknowledgments 1. Can We Survive Green Advice? ............................................................................. 1 Background ...........................................................................1 The Project Setting ...........................................................................1 2. Operationalizing Environmental-NGO Demands in Macroeconomic Models .................. 4 3. Findings from Macroeconomic Simulations ................................................................. 6 4. Adjusting to a Greener Society ............................................................................ 11 The Problems of Adjustment .......................................................................... 11 What About Agricultural Deregulation and the Environment? ....................................................... 11 Can Active Environmental Policies Promote Employment Generation? ......................... ............. 13 Summary and Conclusion ............................................................................ 15 References ......................................................................... 17 Figures Figure 1: Percent reduction in emissions divided by percent reduction in GDP for the alternative scenarios compared to the 2030 base case ........................................................8 Figure 2: Scenario 3: Air Pollution Emissions, 1989=1 .....................................................................8 Figure 3: Scenario 3: Percent Reduction in Emissions Compared to the Government LTP Scenario for 2030 ........................................................................9 Tables Table 1: Five Different Multi-Sector Growth (MSG)-Simulation Results: Percentage Deviation from the 2030 Results of the Government Base Case Scenario ...........................7 Table 2: Percentage Deviation in Private Consumption From the Base Case Scenario for year 2030 (scenario no. 3) .......................................................................9 Table 3: National Wealth for 1989 and for 2030 in 1989 Prices for Each Scenario and the Base Case (1000 Norwegian kroner Per capita) ................................................... 10 Acknowledgments The project for a Sustainable Economy is Ingeborg Rasmussen and Haakon Vennemo funded by the Ministries of Finance and for comments and assistance in preparation of Environment and the National Research this paper, but the author is solely responsible Council of Norway, based on an initiative from for conclusions and interpretations. Friends of the Earth-Norway and the Project Alternative Future of Norway. The author is heavily indebted to Knut H. Alfsen, Pal Foyn Jepersen, Bodil M. Larsen, Environmental Economics Series 1 Can We Survive Green Advice? Background welfare shall be secured the first two to three decades into the next century. The Norwegian society and economy has changed drastically over the last 40 years. Real Since it takes time before changes in policies GDP has increased fourfold, and many activities have their full effect, it is now that our policies that constituted key pillars of the economy and must be carefully adjusted to meet new society in the mid-1950s are now extinct sustainability requirements, in order that (commercial whaling and the floating of logs transition shall be smooth and gradual rather being two such examples). At the same time, a than abrupt and destabilizing. number of new economic activities that were not even in our vocabulary at the time, have taken The Project Setting on a dominant role. These include fish farming, computer hardware and software, modern In spite of the difficulties of seeing the contours means of communication, petroleum sector of the distant future in the crystal ball, it would activities, and a series of public and private appear worthwhile to shed light on the services. It was also not foreseen at that time that potentials and limitations to economic and social women would enter the labor force to the extent development, as seen on the basis of the they have done. In retrospect we can safely knowledge we possess at present with regard to conclude that our projections in the mid-1950s technological progress, natural resources for the turn of the century missed the target by a endowments, and the working of the economy. large margin. Such projections will naturally build on the world as we know it today, and only to a very It appears that exogenous and external limited extent absorb and reflect the genuinely conditions faced by consumers and producers new developments expected towards 2030. are changing at an accelerated pace. We must However, by looking ahead and carefully prepare ourselves for a life in a future world that applying what we know today, we may become is much more integrated and unpredictable than better prepared to trace important characteristics today's, with a more competitive business of the development ahead of us, and as a result environment and increased interdependence be able to make decisions that will provide for a between individuals and nations. New more sustainable development. technologies keep appearing and we will undoubtedly have a much better-educated labor In Norway, we have a tradition of long term force in the future. At the same time the perspective planning in the above spirit. This demographic profile of our population is helps explain why a unique study (Hansen, projected to include rapid growth in the share of Jespersen and Rasmussen 1995) was senior citizens. While it appears virtually commissioned two years ago jointly by the impossible to predict what Norway and the Ministries of Finance and Environment and the world will look like 40 years from now, it will be National Research Council, based on initiatives necessary to plan today for how our social taken by the Friends of the Earth and Project Alternative Futures of Norway at the time of Environmental Economics Series Towards a Sustainable Economy UNCED in 1992. 'Project for a Sustainable impacts on future generations, to be faced by Economy' challenges the long term (1990-2030) today's decision makers. scenarios of the official governmental 4-year long term plan' which portrays a near-doubling The project has established a close professional of most per capita economic indicators by 2030, and political dialogue involving both the and continued increase in CO2 emissions. Ministry of Finance and the Ministry of Environment. This was made possible because Following the Second World War, strong interest Norway has such a long tradition in integrated groups were formed in Norway (as in other use of macroeconomic policy modeling.2 It has industrialized countries) to protect and promote been further facilitated because Statistics particular sector interests (agriculture and Norway pioneered the field of resource resource intensive export industries). These accounting in the 1970s, and gradually lobby groups gradually succeeded in expanded the coverage of environmental establishing favorable conditions for their satellite accounts for use in the routine planning industries in the form of subsidies and strategic and budget work along with national income market positions. accounting. Gradually, this framework was expanded for integration into applied Whereas this might have been useful during the macroeconomic modeling with particular focus structural adjustments of reconstruction of the on the environmental impact of alternative economy following the war, it has gradually macroeconomic development paths. Such become clear that such internal transfers have analyses are now part and parcel of the economic as well as environmental costs to budgetary process of the central government, society. Environmental NGOs such as Friends of and both the Ministry of Finance and the the Earth and independent research projects sectoral ministries (including the Ministry of such as Project for an Alternative Future have Environment) develop scenarios by means of come to see that one approach to altering the multisectoral long term computable general conservation-oriented policy influence of the equilibrium models or medium term partial- above mentioned interest groups, is to adopt equilibrium models. This provides a capacity to economic efficiency arguments with regard to test and a capability to discuss the resources management. In other words, the macroeconomic and environmental impacts of macroeconomic arguments that used to be the their respective policy proposals. strength of the post war interest groups representing industry and agriculture, are now In order to facilitate adoption of project findings being adopted by environmental NGOs and and challenge long term plans of the used in their struggle for less pollution and a government in the public policy debate, the more environmentally benign production and project has adopted the same modeling consumption structure. apparatus and the majority of the assumptions that are being used by the government. The The Project for a Sustainable Economy is a result decision to apply the same modeling apparatus of this evolution. It joins the environmental is not founded in a belief that these models are demands of Friends of the Earth Norway with specially designed to shed light on the the macroeconomic models that are routinely sustainability of a certain economic development used by the central government for national path. The rationale is rather that by adopting planning and budgetary purposes. The idea is to and applying a common set of modeling and simulate long term environmental and analysis tools, a policy dialogue between NGOs economic impacts of imposing such demands and government regarding key sustainability for environmental quality on Norway's small issues is facilitated, and can more easily reach open economy. This analysis then provides a the agenda of parliament, the various political basis for an expanded dialogue on the feasibility parties, and influential interest groups. of various policy choices, with long term ' Ministry of Finance (1993), "St. meld. nr. 4(1992- 2 See Lars Bergman and 0ystein Olsen (1992). 93): Langtidsprogrammet 1994-1997." (Long Term "Economic Modeling in the Nordic Countries." Programme 1994-1997), Oslo. Amsterdam: North Holland Publishing Company. 2 Environment Department Papers Can We Survive Green Advice? The purpose of the simulations presented below priority setting as regards the management of is therefore not to provide detailed long term our resource base for the long term future. forecasts, but rather to supply a broader basis with a much more varied set of development options and impacts for discussion and Environmental Economics Series 3 2 Operationalizing Environmental-NGO Demands in Macroeconomic Models The study contracted the Research Department of One should note that the models have been Statistics Norway to assist in the incorporation of calibrated on the basis of historical data. This puts various environmental demands of Friends of the certain constraints on how far away from historical Earth, and then to simulate Norway's environ- developments one can deviate and still retain some mental and economic development outlook for the faith in the usefulness of the simulations. The initial next forty years as a basis for comparison with the C02-requirement of Friends of the Earth serves to official government perspective. illustrate this problem. Referring to the scientific reports from the UN Intergovernmental Panel for Friends of the Earth posed some fifty-four Climate Change (IPCC), they required a 60% environmental demands to be taken into account by annual reduction in CO2 emissions as Norway's fair the macromodellers. A forum was established to contribution to stabilizing global CO2 determine how these demands could be met by the concentrations. The economic and regulatory project. This forum met regularly for almost a year, policy measures needed to achieve that were and gradually established that out of the fifty-four considered too far from anything the models could environmental demands, twenty-six could be cope with while retaining some validity. It was incorporated in the macromodels. Some of these are therefore decided to strike a compromise and incorporated directly as exogenous impose strong policy measures that would result in constraints/variables, whereas others take the form significant reductions in CO2 emissions, both of goals to be met endogenously as a result of compared to the official government scenarios for explicit macro- or sectoral policy choices, some of 2030, as well as to actual 1989 emissions, but which are very drastic compared to what is admittedly not meeting Norway's share of the envisaged in the government's official long term IPCC goal of stabilizing CO2 concentrations or some scenarios. The remaining twenty-eight demands of the other activity level or output goals stated by could not be met in any meaningful way within the Friends of the Earth. The presented simulations are existing macro-economic models, either because therefore meant to illustrate possible long term they were of a very local nature, or because they environmental and economic impacts if Norway reflected issues and concerns presently not covered makes some drastic policy commitments today and by our national income accounts or satellite sticks to them for an extended period by a process resource accounts. The project has therefore of gradually introducing stiffer economic and initiated a series of parallel partial studies (both regulatory measures related to energy production theoretical and empirical) to shed some light on the and use, while at the same time retain a current role of these environmental concerns as well.3 accounts and public budget balance. The latter two dimensions are important to control because this permits simplification in this modeling context, by 3 The detailed documentation of this project is currently leaving out explicit monetary policy interventions, available in Norwegian only in a series of working currency devaluation and active interest rate papers, and as a book, see Hansen et al (1995). An policies. English edition of the book is in progress. 4 Environment Departrnent Papers Towards a Sustainable Economy The main regulatory measure adopted in the The first simulation applied regulations only, the simulations was to reduce extraction of oil and gas, second simulation applied the CO2 tax only, and the associated investment activities, compared whereas the third simulation combined the two and to that assumed in the official long term plan. This thus adopted a more moderate growth in the C02 would be operationalized by stopping or tax. Additional variations around the third scenario postponing most of the projected developments of were also carried out; the fourth simulation oil and gas fields. The main economic instrument exempts key energy intensive industries from the adopted in the simulations is an isolated CO2 tax, whereas the fifth simulation shows the Norwegian C02 tax which is gradually increased impacts on economic and environmental indicators year by year for all sectors of the economy until if labor input is reduced by 10% compared to other 2015, and from that time stabilized in current simulations. This last simulation is included to prices, with some key energy intensive industries show the possible impacts of a significantly exempted in one of the simulations (simulation 4). increased preference for leisure. Enviromnental Economics Series 5 3 Findings from the Macroeconomic Simulations The simulations suggest that there is substantial different results. In the present simulations, as a resilience in the economy when one has forty result of reducing oil and gas investments, years to adjust to new conditions for production overall investments are reduced, which means and consumption. They also suggest reduced savings (private and overall). Since considerable - albeit significantly less than in private income is initially fixed, this permits the government's long term plan - growth in increased private consumption (although over per capita GDP and private consumption, but time reduced output will also reduce the level of the consumption pattern changes drastically consumption). Alternatively, one could have away from fossil fuel intensive activities such as decided to close the model via the level of total gasoline consumption (this is reduced by around private investments. In that case, as a result of 65% in the various C02-tax simulations). It is reduced oil and gas investments, on-shore important to keep in mind that the simulations investments would have increased because adopt the same assumptions for technological private savings are fixed so long as private improvement in each sector (for example as income is fixed. In other words, the model can regards specific gasoline consumption of the be closed in a way that leads to increased on- future car) as are used in the official long term shore investments, or in another way that leads plan document. to increased private consumption. It is also important to understand that full The long term simulations also assume a fixed employment is implicitly assumed in all the current account balance. Where a deficit in the simulations with the long term multisectoral commodity and services trade arises, the balance growth (MSG) model. In the medium term must be made up by payments of interest, model (MODAG) on the other hand, dividends and foreign aid. To the extent that unemployment and adjustment costs are interest and dividend payments are fixed, it will explicitly modeled. The adjustments are be foreign aid grants that must be reduced (quite significant. The sectoral composition of substantially in some simulations) to meet the production and employment changes current account balance requirement. Subjecting significantly, away from energy and fossil fuel the simulations to such current account dependent sectors. On the other hand, overall constraints implicitly stabilizes foreign exchange employment impacts are less dramatic. and interest rates. At the same time the budget Although there is increased unemployment for balance is quite well maintained, except for the the first few years as a result of policy changes, leisure preference simulation (simulation 5) this effect tapers off gradually. where a large deficit arises, and thus suggests that such a scenario is hardly sustainable. It should be noted that the modeling require- ment to "close" the model can be done in Some key indicators from the five long term different ways, and that each way yields simulations are compared in table 1. 6 Environment Department Papers Towards a Sustainable Economy Table 1. Five Different Multi-Sector Growth (MSG Simulation Results: Percentage Deviation From the 2030 Results of the Government Base Case Scenario Scen. 1 Scen. 2 Scen. 3 Scen. 4 Scen. 5 GNP -5 -4 -8 -7 -18 Priv. Cons. -9 -2 -10 -10 -22 Export -1 -9 -7 -4 -17 Import -3 -5 -6 -5 -13 C02 -15 -30 -35 -26 -40 NMVOC -30 -15 -40 -40 -47 NOx -10 -15 -20 -17 -26 S02 +2 -40 -32 -12 -35 Source: MSG (Multi-Sector Growth) Simulations for Project Sustainable Economy, Norway, carried out by Statistics Norway, March 1995. In simulation 2, a rapidly increasing CO2 tax on these traditional export industries against the top of the CO2 tax already in place is the sole worsening competitive environment (and likely policy instrument in use (other than measures to shutdown) that such a CO2 tax would produce. stabilize the current account so that the Compared to the scenarios where all sectors pay exchange rate and interest rates remain stable). the CO2 tax, this one yields smaller declines in This appears to provide the most cost effective GDP-growth, but CO2 and SO2 emissions way of achieving emissions reductions (see increase substantially relative to those of the figure 1 for a cost-effectiveness comparison of other alternatives for 2030. As in the case of the 5 alternatives). scenarios 1 and 3, foreign aid transfers must be substantially reduced (by around NOK 4 billion, As far as emissions reductions are concerned, equal to 10% in current prices) in order to figures 2 and 3 show that major improvements preserve the over all current account balance are within reach relative to the levels in 1989 when interest and dividend payments are and to the base case scenario in the assumed to be constant. government's long term plan. C02-emissions are reduced by 26 %-40% relative to the 2030 The project does not deal with the base case scenario in the four simulations where macroeconomic costs alone (i.e. GDP and a C02-tax is applied. As regards non-methane consumption losses) of reducing various volatile organic compounds (NMVOC), emissions. It also uses dose-response emissions originate to a large extent from oil information and best available environmental and gas field operations, and reductions are and health value estimates to determine the therefore greatest in the simulations with direct benefits from reduced emissions and reduced regulation of these sectors. S02-emissions on the traffic. It is found that when such benefits are other hand, increase slightly relative to the included in the overall macroeconomic impact government base case if no CO2 tax is assessment, the percentage point loss of GDP is introduced, but decrease significantly in the reduced by 0.5 to 1 percentage point. Since the other scenarios, except for the case where energy direct GDP losses range from 4% (scenario 2) to intensive industries are exempted from the CO2 18% (scenario 5), such benefits improve the tax (simulation 4). overall picture marginally, but they should nevertheless be included for completeness. In simulation 4, the effects of exempting heavy polluting industrial sectors (chemicals and In table 2, changes in the 2030 consumption metals) from the CO2 tax is studied. This pattern compared to that of the government base scenario is included because it is expected that case simulation are presented for the strong interest groups will mobilize to protect regulation/C02-tax combination. Environmental Economics Series 7 Findings from the Macroeconomic Simulations Figure 1: Percent Reduction in Emissions Divided by Percent Reduction in GDP for the Alternative Scenarios Compared to the 2030 Base Case 10 Alt. 1 Alt. 2 Alt. 3 Alt. 4 Alt.5 Alternative scenarios *CO2/GDP [1NMVOC/GDP *NOx/GDP [1S02/GDP Source: MSG-simulations for Project Sustainable Economy, Norway, March 1995 Figure 2 Scenario 3: Air Pollution Emissions, 1989 =1 0.8 \E_ 0.2 1989 1994 1999 2004 2009 2014 2019 2024 2029 ~NOX _C02 OCO . ... VOC Sot .....N20 ____ S02 _ CH4 Source: MSG-simulations for Project Sustainable Economy, Norway 9 Environment Department Papers 8 nvrolmntDearmet a7r Towards a Sustainable Economy Figure 3: Scenario 3: Percent Reduction in Emissions Compared to the Government LTP Scenario for 2030 0 -5 -15 -25 -30 -35 -40 - - -.. - .. , _ . - . -45 -50 __,_ __ _ 1989 1994 1999 2004 2009 2014 2019 2024 2029 ___ NOX _ C02 CO ....... VOC = ,.Soot _ N20 ..--- . _. S02 ___ CH4 Source: MSG-simulations for Project Sustainable Economy, Norway Table 2: Percentage Deviation in Private Consumption from the Base Case Scenario for Year 2030 (simulation 3) Consumption category Per cent change from base case Electricity +2 Stationary use of oil -36 Gasoline -63 Car purchases -10 Public transport -9 Food -5 Beverages -10 Other goods -9 Clothing and footwear -9 Furniture -11 Housing -13 Other services -7 Tourism abroad -14 Total Private Consumption -10.4 Source: MSG simulations for Project for a Sustainable Economy Statistics Norway Sustainable development implies providing capital, and financial assets and debts to other consumption choices that are no less in the future countries. The simulations calculate the resilience than those of the present. Such choices depend to under different policy scenarios of that part of a large extent on the value of national wealth in wealth which is the easiest to measure the sum of the future, i.e. on the management of capital, manmade capital, petroleum wealth, and net natural capital, man-made capital, institutional assets in other countries. It may be seen from Environmental Economics Series 9 Findings from the Macroeconornic Simulations Table 3: National Wealth for 1989 and for 2030 in 1989 prices for Each Scenario and the Base Case (1000 NOK Per Capita) Wealth 1989 Base Scen. 1 Scen. 2 Scen. 3 Scen. 4 Scen. 5 component case 1. Manmade 545 1021 961 971 924 940 845 2. Net foreign 31 113 115 113 115 114 112 assets 3. Petroleum 200 33 58 33 58 58 58 4. Leisure - - - - - 14 Total Wealth 776 1167 1134 1117 1097 1112 1029 Source: MSG simulations for Project for a Sustainable Economy Statistics Norway table 3 that national wealth is almost doubled available for on-shore investments. Petroleum even when the environmental austerity measures wealth, however, increases when it is stored for are introduced. Manmade capital dominates future use. Foreign assets are insensitive to the overwhelmingly (almost 90% of the total), but is scenario choice. reduced when less petroleum revenue becomes 10 Environment Departmnent Papers 4 Adjusting to a Greener Society The Problems of Adjustment approved the governments proposal to deregulate Norwegian agriculture, but how far The long term computable general equilibrium and how fast remains to be seen. Two alternative model (MSG-5) which we have used to produce development scenarios are compared in the the above scenarios is not suited for answering study: The first is labeled the GATT alternative questions about what happens during the and reflects Norwegian commitments through transition from the initial situation to the new GATT with some trade liberalization and equilibrium, which we place 40 years into the reduced transfer payments. The second scenario future. Among other things, MSG-5 assumes full is labeled further liberalization. 4 employment of resources (including labor), which assumes away one of the most pressing Initially, the project has approached the question issues of concern to Norwegian decision makers: of environmental impacts of these two scenarios How will deliberate measures to affect emissions by means of a relatively detailed sectoral increase unemployment? In the long run of 40 equilibrium model (JORDMOD) to examine years, the full employment assumption does not changes relative to a base case scenario for seem unreasonable. However, during the output, land use, and labor demand. A transition period, we need a disequilibrium complementary model has been used to look model that can portray the impacts on more closely at the transition period. In both employment of reductions in offshore petroleum cases the scenarios focus on a situation where activities over and above those assumed in the Norway unilaterally deregulates and liberalizes Governments long term perspective plan. agricultural trade. By and large the model simulations have led to the following 'What About Agricultural Deregulation conclusions: and the Environment? a) Reduced agricultural prices and lower As pointed out initially, the MSG and MODAG transfer payments lead to reduced output models are aggregate descriptions of the and an increase in the average farm size. Norwegian economy. All sectors are therefore b) These structural changes will take place described in very broad terms. For those sectors gradualry. that have proven to be particularly politically sensitive it would seem advantageous to have a The study focuses on the impacts of more detailed description. Agriculture is one such sector that has been submitted to special deregulation and liberalization of agricultural policy on resource use and the environment. The analysis in this project because of its importance followin changes are anticipated in the use of in Norwegian politics and culture, and its gs impact on biodiversity, rural and regional agriculture and biodiversity: settlement patterns and income distribution. Agriculture in Norway has traditionally been a) Lower output and reduced cultivated area; highly protected and has received substantial transfer payments. The Parliament has recently 4 Professor Kyrre Rickertsen has been in charge of these comparative studies for the project. Environmental Economics Series 11 Towards a Sustainable Economy b) Lower output prices and reduced factor of non-renewable inputs. In line with this there input per unit of area; is no reason to assume that a transition to larger farm sizes would impact significantly on the c) Accelerated structural change; level of pollution from agriculture in Norway, so long as the minimum area required per animal is d) Regional changes in production; and retained. e) Changes in the degree of specialization in There are, however, good reasons to believe that agriculture. a transition to larger farms will impact significantly on the land use structure on Reduced output from agriculture leads to individual farm lots. A likely outcome could be reduced use of non-renewable resources and reduced edges and "islands" and, as a reduced pollution from agriculture in Norway. consequence, reduced biodiversity. At the same time agricultural imports will increase. The overall regional and global Reduced producer prices from agricultural environmental impacts will therefore depend on deregulation would lead to diminished demand resource use and emissions changes in countries for chemical fertilizer per unit of cultivated land. with rising exports to Norway. Obviously, This would reduce the nitrogen runoff. Such a increased grain imports from Denmark will have marginal reduction in the amount of fertilizer a different pollution effect on the North Sea than use would have a minimal impact on grain imports from Argentina would have! biodiversity, but if authorities also retain high Similarly, increased imports of dairy products subsidies per unit of cultivated land and grazing from the Netherlands would pollute the North animal, then it will become more profitable for sea a lot more than the same package of imports many farmers to switch to animal husbandry from New Zealand. At the same time dumping based on pasture feeding. This could have of Norwegian dairy surplus would cease, and substantial positive biodiversity impacts. this would reduce local pollution in Norway. Reduced use of chemical fertilizer on marginal agricultural lands would improve the growing In Norway's most productive grain growing conditions for many stress-tolerant plant species, areas roughly 50% of the land is cultivated. A and increased incidence of flowering plants decline in cultivated land in these parts of the would be beneficial for nectar- and pollen- country is likely to impact positively on consuming insects. biodiversity. Reduced agricultural profitability would also make it less attractive to clear and Based on the JORDMOD simulations we cannot cultivate environmentally vulnerable wetlands draw any firm conclusions about regional and reduce the pressures on such lands. changes in output that would result from However, it is reasonable to expect a lot of the deregulation and trade liberalization. Among reductions in agricultural activity to take place other things, the outcome will hinge upon what in marginal areas where cultivated land happens to the quota system for dairy farmers. constitutes but a small share of total land, and a Unless the government actively prevents an reduction in cultivated areas in such regions increase in livestock rearing in the Oslo region is would impact negatively on biodiversity. In likely to occur in response to sharp reductions countries like Denmark and the Netherlands in grain growing activity. Such a regional where most land is already cultivated, the change in activity is unlikely to reduce the biodiversity impact is likely to be the opposite emission of nitrogen salts to the North Sea. from that expected in a sparsely populated However, this structural and regional change is country such as Norway. unlikely to raise the use of non-renewable resources per unit of output, and increased As regards the difference in input use between animal husbandry around Oslo is likely to lead small and large farms, the only conclusion to reduced soil erosion and improved derived with some statistical confidence is that biodiversity. large farms use considerably less machinery and fuel per unit of dairy output than small farms. Deregulation will probably affect the degree of There is thus no apparent conflict between more specialization, but the direction of change is efficient grain and dairy production and the use hard to predict. Deregulation stimulates 12 Environment Department Papers Adjusting to a Greener Society competition in a traditionally well protected analysis for these sectors, as a complement to the sector and this may induce risk-averse farmers comprehensive economy-wide results from to diversity. What can be said, however, is that Statistics Norway. increased specialization - if it occurs - would probably impact negatively on both pollution Before describing the empirical results, a brief and biodiversity. theoretical review of the conditions for achieving so-called "double dividends", i.e. simultaneous What if the European Union (EU) were to improvements in employment and liberalize agricultural trade and introduce policy environmental conditions, is presented.5 measures that internalize the negative pollution externalities from excessively intensive The hypothesis is that "double dividends" can agriculture? The first thing to note is that this be achieved by shifting the tax burden in society would impact on the relative competitiveness of from labor onto scarce natural resources farming in the most densely developed farming (productive and absorptive). In recent years a lot communities in the EU. The so-called MacSharry of economic research has focused on clarifying plan and the nitrate directive of EU can serve to how the economic system, including the system illustrate this point. The MacSharry plan impacts of taxes and fees, can become more efficient, and significantly on agricultural output and trade, the creation of a political climate for and reduces nitrate emissions significantly. The implementing such reforms.6 gradual implementation of the nitrate directive will significantly reduce livestock herds in Two opposing views form the starting point of Belgium, The Netherlands and Denmark, and the analysis: the accompanying excessive pollution. As a result, exports of dairy products and meat from a) There is a fundamental conflict between these countries would decline significantly. employment and environmental Combining these two policy measures (the considerations. We cannot have more MacSharry Plan and the Nitrate Directive) of both, we must choose between them. would raise world market prices for agricultural produce and reduce pollution from agriculture. b) It is possible to pursue a policy, or This would undoubtedly have a positive impact policy reforms, so that both goals can be on Norway's dairy and livestock sector, which promoted simultaneously. pollutes a lot less than its continental competitors. If all farming communities in 5 Jon Strand (forthcoming). Europe were to internalize their respective environmental externalities, stemming mostly 6 Important contributions to this debate started with from pollution caused by intensification, the seminal article by Agnar Sandmo (1975), Norwegian dairy farmers would become much "Optimal Taxation in the Presence of Externalities." more competitive. Stockholm: Swedish Journal of Economics. Other significant recent contributions include the following Can Active Environmental Policies forthcoming ones: Lawrence H. Goulder (1994), "Environmental Taxation and the "Double Promote Employment Generation? Dividend": A Readers Guide." Presented at the 50th Congress of the International Institute of Public The above structural adjustment discussion Finance, August 22-25,1994, Harvard University. Ian leads naturally to the question: Is it possible to W.H. Parry (1994), "Pollution Taxes and Revenue combine policy measures in such a way that the Recycling." Presented at the International Workshop environment is improved and unemployment on Environmental Taxation, Revenue Recycling and reduced at the same time? The economy-wide Unemployment, December 16-17,1994, Fondazione reduedra thequisabrimeMSG tme? Eni Enrico Mattei, Milano, Italy. Jon Strand (1995), "Environmental Policy, Worker Moral Hazard, and unable to answer this question. There are, the Double Dividend Issue." Revised version of paper however, complementary macromodels of the presented at the above mentioned Milan workshop, Norwegian economy designed to study the and, Peter Bohm (1995), "Environmental Taxes, medium term effects of efforts to curb pollution Carbon Taxes, Tax Recycling, and Tax Distortions." emissions from industry. One such model has Revised and extended version of paper presented at therefore been used to supply more detailed the above mentioned IIPF Congress, Harvard University, 22-25 August 1994. Environmental Economics Series 13 Towards a Sustainable Economy Environmental NGOs typically have argued for most effective approach from an economy-wide the second position by proposing the perspective. Assume then that the authorities for substitution of environmental taxes for taxes on some reason decide not to apply these policy labor, and have recently received support from measures, but rather adopt policies to achieve the CEO of Norway's Central Bank on this issue. environmental targets which have as a side Industry and labor unions have been far more effect an increase in employment (for example, reluctant to accept this position as a basis for imagine a policy package composed of long term planning of Norway's future environmental cleanup actions and subsidies to development. the companies' own environmental investments). The critical question then becomes: It is obvious that measures that have a desirable Should the increased employment be attributed environmental impact can have either positive to the environmental policy measures? or adverse employment impacts. The employment effects of a given environmental When the economy at the outset is inefficiently improvement depend both on the strength organized (as it normally is!), one can point to a (dosage) of the measure and its very nature. As number of situations where it is reasonable to regards the nature of the policy measure, it is expect that improved environmental obvious that the immediate employment effects management by means of increased of the environmental improvement will be environmental taxation, will generate more stronger if the initially unemployed are employment. This applies when the improved employed directly in an environmental cleanup environment is of direct benefit to industrial operation, as compared to a case where the same productivity, when the environmental environmental cleanup is achieved by the management measures are labor intensive, and closing down of the polluting plants. As for the when public funding is required for the dosage of a given policy measure, it is intuitively development of new and potentially profitable easy to see that to require a plant to adjust its environmental technologies and products. emissions by means of abatement control or process-improving investnents will yield a The simulations with the medium-term more benign employment effect for society than MISMOD model (see Hakonsen and Mathiesen, a requirement that emissions be totally 1994) establish that by gradually expanding the eliminated, with the risk that the plant will close dimensions of the welfare function to be down. maximized, and taking into account increasingly more pollutants and environmental impacts, the In other words, there is no clear and one-to-one computed overall welfare level of a given C02- relationship between the immediate impacts of reduction, as well as the optimal level of C02- such stand-alone measures and the reduction, increases. economywide impacts. It becomes even more complex when one visualizes the authorities We have not in any way attempted to estimate adopting a whole range of other policy measures the value of future damages (and benefits) of (such as other types of taxes and subsidies or possible climate change, since these are assumed direct regulations) in order to promote to be far in the future. The first benefits derived employment, and in fact that is precisely what from a CO2 tax in our model of an initially governments tend to do! Further complexities inefficient economy refers to the effect of the arise when one has to determine if the other payroll-tax offsetting public revenue generated policies (outside the sphere of employment by a C02 tax that reduces CO2 emissions. Due to promotion and environmental protection) are the assumed initial distortions and inefficiency it optimal in some economic sense. generates, the new equilibrium will be more efficient and yield a higher welfare level for up The latter issue is illustrated as follows: Assume to a 10 percent c02-emission reduction in our considerable unemployment, which in principle simulations. With 20 percent emission can be reduced by policy measures independent reductions, the welfare level declines of environmental considerations (e.g. changes in marginally. corporate taxes, unemployment compensation, etc.). Assume also that it can be established that However, two more factors must be taken into such a strategy for employment creation is the account: First, the way in which the C02-tax 14 Environment Department Papers Adjusting to a Greener Society revenue is recycled back into the economy all. Whereas environmentalists were concerned affects the overall efficiency of the economy. If it about irreversible global warming threats, were recycled directly to households in the form erosion of biodiversity and accumulation of of a lump sum payment, the efficiency gain, the toxics in the nutritional chains, all of these are welfare effect and the employment generation assumed to be effects of excessive resource effect would be less than with the above depletion, the economists were interpreted as described payroll tax reduction. Second, if the arguing that there is virtually unlimited scope welfare function is expanded to include the for substitution between manmade and natural value of reduced pollution damages (not capital, and that technological progress would including possible future damages from climate come to our rescue and enhance carrying change) on health, crops and property, the capacities of this planet. overall welfare will increase relative to base case, and reach its optimum if the C02-tax were This confrontation peaked when the long term to go up to a level that would reduce the C02- perspective plan of the Government in 1993 emissions by 20 percent relative to the projected presented a base case for the next 40 years with basecase year 2000 level. The corresponding a virtual doubling of per capital real C02-tax of $82 per ton C02 would then generate consumption and some 20% increase in C02 enough public revenue to offset a 50 percent emissions, shortly after the Rio declaration. reduction in the employers' payroll taxes. These simulations thus suggest that a C02-emission The purpose of this study was therefore to stabilization policy in Norway would be a so- "hand over" the country to the environmental called "no-regrets policy" independent of the NGOs and study the impacts of their rulings on C02 reduction goal stated by the Norwegian key economic, social and environmental Parliament. The value of the economic development indicators. The NGO efficiency gain and of the reduced emission representative accepted the challenge of damages (NOx, S02, CH4, CO, SPM, etc.) lead to working closely together with the economists for this conclusion. two and a half years in order to have agreement on basic assumptions and policies that could be The result appears to be resilient to quite quantified and examined in a model context. significant variations in assumptions regarding The study did this by adopting and applying the the functions of the labor market, but the most very same macroeconomic multisectoral long energy consuming and C02 emitting production term growth models, and the same sectors would suffer significantly, and technological, demographic, and "rest of the experience structural reforms and close downs. world" assumptions, as the official perspective We should also remind ourselves of the study, but incorporated a large series of importance of the base case to which the environmental goals and conditions (twenty-six simulations are compared; an economy with in all) put forward by the environmental NGOs, initial distortions and inefficiencies where as opposed to a completely different set of such adverse externalities are not internalized. If assumptions in the official scenarios. such externalities were initially internalized, the welfare effects from the payroll tax offsetting Thus the project has brought economic planning policy would be less, and the optimal level of tools to the environmentalists and involved C02-emissions reductions would be around 10 them actively in formulating their demands on percent compared to base case emission levels development in the form of variables that can be handled by economic growth models used in Summary and Conclusion official long term planning. This has established a completely new basis for dialogue between the This study emerged from the frustrations of two opposing sides in this development debate. opposing parties in the Norwegian policy debate; the economists in the Ministry of Finance What are the key findings from the policy and the Environmental NGOs. Both parties felt simulations with the different complementary the other side did not understand their position growth models used? and line of reasoning, and they shared the experience that they communicated poorly, if at First of all, there appears to be substantial resilience in the economy when allowed forty Environmental Economics Series 15 Towards a Sustainable Economy years to adjust and adapt, even when it is small there are significant distortions and and open. Even with harsh policy measures unemployment in the economy. such as a rapidly increasing CO2 tax (which no other country is assumed to introduce) there will The study has thus shown that there is scope for be sustained economic growth, albeit at a a much broader debate about realistic and somewhat slower pace. However, over a forty realizable alternative futures than what year horizon we will experience a slowdown appeared to be the case on the basis of the long comparable to a ten year delay, which many term perspective analysis alone. This may prove would consider a rather small insurance to be a valuable finding if and when firmer premium to pay for the reduced risks of climate change evidence is established. The irreversible environmental damages, and much study was funded jointly by the Ministries of improved local environment conditions. Finance and Environment together with the National Research Council. These parties were Second, it would appear quite feasible in the actively taking part in its evolution, and as a medium term to stabilize or even reduce CO2 result a lot has been clarified for the NGOs as emissions and many accompanying emissions regards what such models and studies can tell by means of revenue neutral "green" tax us and what their limitations are." reforms, with minimal loss of economic growth, and perhaps with net welfare/employment gains, when taking as a point of departure that 16 Environment Department Papers References Bergman ,Lars and 0ystein Olsen. 1992. Economic Modeling in the Nordic Countries. Amsterdam: North Holland Publishing Company. Bohm, Peter. 1995. Environmental Taxes, Carbon Taxes, Tax Recycling, and Tax Distortions . Revised and extended version of paper presented at the above mentioned IIPF Congress, Harvard University, 22-25 August 1994. Cappelen, Adne. 1991. MODAG - A Medium Term Macroeconometric Model of the Norwegian Economy. 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